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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934 for the Transition Period From to
Commission file number 000-21642
AMTRAN, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1617970
------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7337 West Washington Street
Indianapolis, Indiana 46231
--------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
(317) 247-4000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the court. Yes ______ No ______
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, Without Par Value - 11,645,529 shares as of February 28, 1998.
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933.
Portions of the Amtran, Inc. and Subsidiaries' Proxy Statement dated April 3,
1998, are incorporated by reference into Part III.
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT - 1997
AMTRAN INC. AND SUBSIDIARIES
Page #
PART I
Item 1. Business............................................................................................3
Item 2. Properties.........................................................................................18
Item 3. Legal Proceedings..................................................................................20
Item 4. Submission of Matters to a Vote of Security Holders................................................20
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters.......................20
Item 6. Selected Consolidated Financial Data...............................................................21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............22
Item 8 Financial Statements and Supplementary Data........................................................52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............68
PART III
Item 10. Directors and Officers of the Registrant...........................................................69
Item 11. Executive Compensation.............................................................................69
Item 12. Security Ownership of Certain Beneficial Owners and Management.....................................69
Item 13. Certain Relationships and Related Transactions.....................................................69
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.....................................70
PART I
Item 1. Business
General
Amtran, Inc. (the "Company") is a leading provider of charter
airline services, and on a targeted basis scheduled airline
services, to leisure and other value-oriented travelers. Amtran,
through its principal subsidiary, American Trans Air, Inc.
("ATA"), has been in operation for 24 years and currently
operates the eleventh largest airline in the United States in
terms of 1997 revenue passenger miles ("RPMs"). The Company
provides charter services throughout the world to independent
tour operators, corporations and the U.S. military, and also
provides scheduled service primarily from its gateway cities of
Chicago-Midway, Indianapolis and Milwaukee to popular vacation
destinations such as Hawaii, Las Vegas, Florida, California,
Mexico and the Caribbean.
Charter Service
The Company is the largest charter airline in the United States
and provides charter airline services throughout the world to
U.S., South American and European tour operators, U.S. military
and government agencies and corporations. In 1997 and 1996, the
Company derived approximately 45.9% and 41.4%, respectively, of
consolidated revenues from charter operations. The charter
business is an attractive niche for the Company because it
provides contractual revenues which are generally more stable
than revenues provided by scheduled service. The customer
generally pays a fixed price for the use of the aircraft and
assumes the responsibility and risk for the actual sale of the
seats, as well as most of the risk of fuel price increases.
Tour Operator Programs
Independent tour operators comprise the largest component of the
Company's charter service operations, representing approximately
29.1% and 30.2%, respectively, of consolidated revenues for 1997
and 1996. Independent tour operators typically contract with the
Company to provide repetitive, round-trip patterns to leisure
destinations for specified periods ranging from several weeks to
several years. The Company believes that its long-standing
relationships with tour operators provide it with a competitive
advantage.
Military/Government
The Company's U.S. military and other government flight
operations comprised approximately 16.8% and 11.2%,
respectively, of consolidated revenues for 1997 and 1996. The
Company has provided charter service to the U.S. military since
1983. Because this business is generally less seasonal than
leisure travel, it tends to have a stabilizing impact on the
Company's operations and earnings. The U.S. government awards
one-year contracts for its military charter business and
pre-negotiates contract prices for each type of aircraft a
carrier makes available. Such contracts are priced utilizing the
participating airlines' average costs, and are therefore more
profitable for low-cost providers such as the Company. The
Company believes its fleet of aircraft, in particular its Boeing
757-200ERs, is well suited for the current requirements of
military passenger service.
Scheduled Service
The Company provides scheduled service primarily from its
gateway cities of Chicago-Midway, Indianapolis and Milwaukee to
popular vacation destinations such as Hawaii, Las Vegas,
Florida, California, Mexico and the Caribbean. In its scheduled
service operations, the Company focuses primarily on providing
low-cost, nonstop or direct flights on routes where it can be a
principal provider. For the 12 months ended September 30, 1997,
based on Department of Transportation ("DOT") statistics, the
Company had the lowest operating cost per available seat mile
("ASM"), approximately 6(cent), of the 11 largest U.S. scheduled
airlines. Notwithstanding the Company's competitive cost
position and business focus, the Company began to incur losses
in its scheduled service in late 1995. In response to these
losses, the Company, as part of the 1996 restructuring described
below, reduced its scheduled service by more than one-third of
its departures and ASMs. The Company's scheduled service
operations comprised 47.5% and 51.5%, respectively, of
consolidated revenues in 1997 and 1996. The 1996 restructuring
strengthened the Company's competitive position for scheduled
service by improving both load factors and yields in these
operations. The Company has substantially improved the
profitability of the scheduled service business in 1997 as
compared to 1996, and has selectively expanded its scheduled
service during 1997.
Strategy
The Company intends to enhance its position as a leading
provider to independent tour operators, the U.S. military and of
targeted scheduled airline services by pursuing a strategy
designed to increase revenues and profitability. The key
components of this strategy are:
(i) Maintain Low-Cost Position. The Company has one of the
lowest operating costs per ASM in the industry, with an average
cost per ASM of approximately 6(cent) for the fiscal years ended
December 31, 1997 and 1996. The Company believes that its
low-cost structure provides a significant competitive advantage,
which allows it to operate profitably while selling highly
competitive fares in both the charter and scheduled service
markets. The Company has achieved its low-cost position
primarily as a result of its route structure, low overhead and
distribution costs, productive and flexible work force and low
aircraft rental and ownership costs.
(ii) Strengthen Leading Position with Tour Operators. The
Company has successfully operated in the charter service
business since 1981, and it expects to continue to enhance its
leading position in this business. By offering low-cost air
travel products that can be tailored to meet the particular
needs of its customers, primarily the tour operators, the
Company believes it is able to differentiate itself from most
major airlines, whose principal focus is on scheduled service,
as well as from smaller charter airlines, which do not have
comparably diverse fleets or the ability to provide a similar
level of customer support. In addition to its low cost, the
Company believes that its product quality, reputation,
long-standing relationships and ability to deliver a customized
service have become increasingly important to tour operators.
(iii) Maintain Leading Position as a Provider to the U.S.
Military. The Company has a long history of serving the
military. The Company believes that its contractor teaming
arrangement and its long-range fleet of Boeing 757-200 aircraft
will allow it to maintain a strong competitive position for
acquiring and servicing current and future military charter
contracts.
(iv) Selectively Participate in Scheduled Service. The Company's
strategy for its scheduled service is to focus primarily on
providing low-cost, nonstop or direct flights from airports
where it has market or aircraft advantages in addition to its
low cost. The Company believes that its high performance Boeing
757-200 and Boeing 727-200ADV aircraft give it a competitive
advantage in the Chicago-Midway market, which accounted for
approximately 41.5% of scheduled service passengers boarded in
1997. Unlike the aircraft used by most of the Company's
competitors at Chicago-Midway, these aircraft can fly larger
passenger capacities substantially longer distances while
operating from the airport's short runways. In Indianapolis, the
Company has a name recognition advantage by being the city's
hometown airline. In the Milwaukee market, the Company is the
only low-cost scheduled alternative. The Company has announced
the addition of nonstop Dallas/Ft. Worth, San Juan and Denver
service from its Chicago-Midway complex beginning in May 1998,
and by June 1998 the Company expects to operate more than 50
daily departures from Chicago-Midway.
(v) Capitalize on Selected Growth Opportunities. The Company
seeks to increase revenues and profitability by capitalizing on
selected growth opportunities in its core businesses. The
Company believes that, as a result of its low-cost structure and
its strong relationships with tour operators and military
contractors, it is well positioned to capture additional
opportunities to serve these markets. The Company intends to
purchase or lease additional aircraft to meet demand from its
military and tour operator charter customers, and potentially to
expand scheduled service. In addition, at various times since
the second quarter of 1996, the Company has actively considered
possible business combinations with other air carriers and other
providers of airline-related services. The Company intends to
continue to evaluate such transactions.
1996 Restructuring of Scheduled Service Operations
An analysis by the Company in 1996 of the profitability of its
scheduled service and charter service business units revealed
that a significant number of scheduled service markets being
served by the Company had become unprofitable at that point in
time. This analysis also showed that the Company's charter
operations were generally profitable during the same periods,
although results from these operations were also adversely
affected by many of the factors that affected scheduled service.
The Company believes that several key factors contributed to the
deterioration of profitability of scheduled service over this
time period. Beginning in January 1996, a growing amount of
low-fare competition entered the Boston-Florida and
midwest-Florida markets, which increased total capacity in these
markets and decreased the average fares earned by the Company.
Operating revenues in all scheduled service markets were further
adversely affected by the ValuJet accident in Florida on May 11,
1996. This event focused significant negative media attention on
airline safety, and on low-fare carriers in particular. In spite
of the Company's excellent safety record, having had no serious
injuries or fatalities since its inception, the Company
estimates that it lost significant scheduled service revenues in
the second and third quarters of 1996 from canceled reservations
and reservations which were never received. Additionally,
effective October 1, 1995, the Company became subject to a
federal excise tax of 4.3(cent) per gallon on jet fuel consumed
in domestic use. During 1996, the market price of jet fuel also
increased significantly as compared to prices paid in comparable
1995 periods, largely due to tight jet fuel inventories relative
to demand throughout this period. See "--Management's Discussion
and Analysis of Financial Condition and Results of Operations."
In August 1996, the Company announced a significant reduction in
scheduled service operations. More than one-third of scheduled
service departures and ASMs were included in this schedule
reduction. The Company eliminated its unprofitable Boston and
intra-Florida operations. The Company also exited, or reduced in
frequency, operations to other selected markets from
Chicago-Midway, Indianapolis and Milwaukee. Exited operations
were phased out over a three-month period ending December 2,
1996. The Company believes this process strengthened its
competitive position and improved both load factors and yields
in its remaining scheduled service operations. The Company has
substantially improved the profitability of these operations in
1997 as compared to 1996.
Based upon the improved financial performance of scheduled
service in 1997 the Company added new service in June between
New York's John F. Kennedy International Airport and
Chicago-Midway, Indianapolis and St. Petersburg, and also added
several frequencies between the midwest and the west coast for
the summer season. New York service to Chicago-Midway and St.
Petersburg was retained for the 1997-98 winter season. New
nonstop service between Chicago-Midway and Dallas-Ft. Worth,
Denver and San Juan have been announced beginning in May 1998.
In addition, the Company's application for slots at New York's
La Guardia Airport are currently pending with the DOT which, if
approved, the Company intends to use for daily frequencies to
Chicago-Midway. The Company estimates that these additions to
scheduled service will result in flying approximately 22% more
scheduled service ASMs in 1998 than in 1997. In order to operate
this expanded schedule, several narrow-body aircraft have been
reallocated from charter operations and full-time equivalent
employees were increased by approximately 10% as of the fourth
quarter of 1997, as compared to the fourth quarter of 1996.
Background of the Company
ATA flew its maiden flight on a Boeing 720 between Indianapolis
and Orlando in December 1973. It was certificated as a public
charter carrier in 1981 and as a scheduled air carrier in 1985.
ATA grew from approximately 355 million RPMs in 1982, its first
full year as a public charter carrier, to approximately 9.0
billion RPMs in 1997. In 1973, the Company's fleet consisted of
a single leased Boeing 720. As of December 31, 1997, the
Company's fleet consisted of 45 aircraft. The following table
illustrates the growth of the Company over the past ten years:
Year Ended December 31,
1988 1989 1990 1991 1992
(Dollars in millions)
Operating revenues $ 253.9 $ 279.1 $ 371.4 $ 414.0 $ 421.8
Net income (loss) $ 7.0 $ 4.4 $ (2.0) $ 5.6 $ (2.1)
Total assets $ 193.4 $ 238.4 $ 251.8 $ 237.4 $ 239.0
Block hours 42,642 49,222 57,847 60,177 65,583
ASMs (in millions) 4,857 5,374 6,755 7,111 7,521
Employees (at period end) 1,789 2,134 2,310 2,205 2,412
Year Ended December 31,
1993 1994 1995 1996 1997
(Dollars in millions)
Operating revenues $ 467.9 $ 580.5 $ 715.0 $ 750.9 $ 783.2
Net income (loss) $ 3.0 $ 3.5 $ 8.5 $ (26.7) $ 1.6
Total assets $ 269.8 $ 346.3 $ 413.1 $ 369.6 $ 450.9
Block hours 76,542 103,657 126,295 138,114 139,426
ASMs (in millions) 8,232 10,443 12,521 13,296 12,648
Employees (at period end) 3,418 4,136 4,830 4,435 5,012
Services Offered
The Company generally provides its airline services to its
customers in the form of charter and scheduled service. The
following table provides a summary of the Company's major
revenue sources for the periods indicated:
Year Ended December 31,
1993 1994 1995 1996 1997
% of % of % of % of % of
Amount total Amount total Amount total Amount total Amount total
---------------------------------- ---------------------------------- -----------------
(Dollars in millions)
Charter
Tour operator $213.7 45.7% $204.0 35.1% $229.5 32.1% $226.4 30.2% $228.1 29.1%
Military 78.4 16.7% 91.8 15.8% 77.5 10.8% 84.2 11.2% 131.1 16.8%
Total charter 292.1 62.4% 295.8 50.9% 307.0 42.9% 310.6 41.4% 359.2 45.9%
Scheduled service 138.0 29.5% 240.7 41.5% 362.0 50.6% 386.5 51.5% 371.8 47.5%
Other 37.8 8.1% 44.0 7.6% 46.0 6.5% 53.8 7.1% 52.2 6.6%
================================== ================================== =================
Total $467.9 100.0% $580.5 100.0% $715.0 100.0% $750.9 100.0% $783.2 100.0%
================================== ================================== =================
Charter Sales
As illustrated in the above table, charter sales represented
45.9% of the Company's consolidated revenues for 1997 and 41.4%
for 1996. The Company's principal customers for charter sales
are tour operators, military and government agencies, sponsors
of incentive travel packages and specialty charter customers.
Tour Operator Programs
Sales to tour operators accounted for approximately 29.1% of
consolidated revenues for 1997 and 30.2% for 1996. These leisure
market programs are generally contracted for repetitive,
round-trip patterns, operating over varying periods of time. In
such an arrangement, the tour operator pays a fixed price for
use of the aircraft (which includes the services of the cockpit
crew and flight attendants, together with check-in, baggage
handling, maintenance services, catering and all necessary
aircraft handling services) and assumes responsibility and risk
for the actual sale of the available aircraft seats. Because the
Company has a contract with its customers for each flight or
series of flights, it can, subject to competitive constraints,
structure the terms of each contract to reflect the costs of
providing the specific service, together with an acceptable
return.
In connection with its sales to tour operators, the Company
seeks to minimize its exposure to unexpected changes in operat-
ing costs. Under its contracts with tour operators, the Company
is able to pass through most increases in fuel costs from a
contracted price. Under these contracts, if the fuel increase
causes the tour operator's fuel cost to rise in excess of 10%,
the tour operator has the option of canceling the contract. The
Company is exposed to increases in fuel costs that occur within
14 days of flight time, to all increases associated with its
scheduled service (other than bulk-seat sales) and to increases
affecting any contracts that do not include fuel cost escalation
provisions. See "-- Fuel Price Risk Management."
The Company believes that although price is the principal
competitive criterion for its tour operator programs, product
quality, reputation for reliability and delivery of services
which are customized to specific needs have become increasingly
important to the buyer of this product. Accordingly, as the
Company continues to emphasize the growth and profitability of
this business unit, it will seek to maintain its low-cost
pricing advantage, while differentiating itself from competitors
through the delivery of customized services and the maintenance
of consistent and dependable operations. In this manner, the
Company believes that it will produce significant value for its
tour operator partners by delivering an attractively priced
product which exceeds the leisure traveler's expectations.
Although the Company serves tour operators on a worldwide basis,
its primary customers are U.S.-based and European-based tour
operators. European tour operators accounted for 3.2%, 4.6%,
2.4% and 2.3%, respectively, of consolidated revenues for 1997,
1996, 1995 and 1994. In addition, contracts with most European
tour operators establish prices payable to the Company in U.S.
dollars, thereby reducing the Company's foreign currency risk.
The Company's five largest tour operator customers represented
approximately 16% and 22%, respectively, of the Company's
consolidated revenues for 1997 and 1996, and the ten largest
tour operator customers represented approximately 21% and 30% of
the Company's consolidated revenues for the same periods.
Military/Government
In 1997 and 1996, military/government sales were approximately
16.8% and 11.2%, respectively, of the Company's consolidated
revenues. Traditionally, the Company's focus has been on
short-term "contract expansion" business which is routinely
awarded by the U.S. government based on price and availability
of appropriate aircraft. The U.S. government awards one-year
contracts for its military charter business and pre-negotiates
contract prices for each type of aircraft a carrier makes
available. Such contracts are awarded based upon the
participating airlines' average costs and are therefore more
profitable for low-cost providers such as the Company. The
short-term expansion business is awarded pro rata to those
carriers with aircraft availability who have been awarded the
most fixed-award business, and then to any additional carrier
that has aircraft available. The Company's contractor teaming
arrangement with four other cargo airlines significantly
increases the likelihood that the team will receive both
fixed-award and contract expansion business, and increases the
Company's opportunity to provide the passenger portion of such
services because the Company represents all of the team's
passenger transport capacity. See " -- Sales and Marketing."
Military and other government flight activity is expected to
remain a significant factor in the Company's business mix.
Because this business is generally less seasonal than leisure
travel, it tends to have a stabilizing impact on the Company's
operations and earnings. The Company believes its fleet of
aircraft is well suited for the requirements of military
passenger service. Although the military is reducing its troop
deployments at foreign bases, the military still desires to
maintain its schedule frequency to these bases. Therefore, the
military has a need for smaller capacity aircraft possessing
long-range capability, such as the Company's Boeing 757-200ER
aircraft. In 1993, the Company became the first North American
carrier to receive Federal Aviation Administration ("FAA")
certification to operate Boeing 757-200 aircraft with 180-minute
Extended Twin Engine Operation ("ETOPS"). This certification
permits specially equipped Boeing 757-200 aircraft to
participate in long-range missions over water in which the
aircraft may fly up to three hours from the nearest alternate
airport. All of the Company's Boeing 757-200s are so equipped
and certified. The Company believes that this 180-minute ETOPS
capability has enhanced the Company's ability to obtain awards
for certain long-range missions.
The Company is subject to biennial inspections by the military
as a condition of retaining its eligibility to perform military
charter flights. The last such inspection was completed in the
fourth quarter of 1997. As a result of the Company's military
business, it has been required from time to time to meet
operational standards beyond those normally required by the DOT,
FAA, and other government agencies.
Other Charter Services
Incentive Travel Programs. Many corporations offer travel to
leisure destinations or special events as incentive awards for
employees. The Company has historically provided air travel for
many corporate incentive programs. Incentive travel customers
range from national incentive marketing companies to large
corporations that handle their incentive travel programs on an
in-house basis.
The Company believes that its flexibility, fleet diversity and
attention to detail have helped to establish it as one of the
leaders in providing the air portion of incentive travel airline
charter services. Generally, incentive travel operations are a
demanding and highly customized part of the charter airline
business. Incentive travel operations can vary from a single
round-trip flight to an extensive overseas pattern involving
thousands of employees and their families.
Specialty Charters. The Company operates a significant number of
specialty charter flights. These programs are normally
contracted on a single round-trip basis and vary extensively in
nature, from flying university alumni to a football game, to
transporting political candidates on campaign trips, to moving
the NASA space shuttle ground crew to an alternate landing site.
These flights, which are arranged on very short notice based on
aircraft availability, allow the Company to increase aircraft
utilization during off-peak periods.
The Company believes it is able to attract customers for
specialty charter due to its fleet size and diversity of
aircraft. The size and geographic dispersion of the Company's
fleet reduces nonproductive ferry time for aircraft and crews,
resulting in more competitive pricing. The diversity of aircraft
types in its fleet also allows the Company to better match a
customer's particular needs with the type of aircraft best
suited to satisfy those requirements.
Scheduled Service Sales
In scheduled service, the Company markets air travel, as well as
packaged leisure travel products, directly to retail consumers
in selected markets. During 1997 and 1996, scheduled service
provided 47.5% and 51.5%, respectively, of the Company's
consolidated revenues. The Company's strategy for its scheduled
service is to offer low-cost, nonstop or direct flights which
provide convenience and a simplified pricing structure oriented
to the buyer of leisure travel services. The Company focuses
primarily on serving selected leisure destinations from airports
which do not have convenient travel alternatives through other
scheduled airlines, or where there is only limited competition.
The Company's scheduled service operations link the Company's
gateway cities of Chicago-Midway, Indianapolis and Milwaukee
with several popular vacation destinations such as Hawaii, Las
Vegas, California, Mexico, Florida and the Caribbean. In August
1996, the Company announced a significant reduction in scheduled
service operations. More than one-third of scheduled service
departures and ASMs were included in this schedule reduction.
The Company completely eliminated its unprofitable Boston and
intra-Florida operations. The Company also exited, or reduced in
frequency, operations to other selected markets from
Chicago-Midway, Indianapolis and Milwaukee during 1996. As
competitive conditions have improved in 1997, the Company has,
on a selective basis, expanded this business, particularly from
its Chicago-Midway gateway.
Beginning October 27, 1996 the Company implemented a code share
agreement with Chicago Express, Inc., an independent commuter
airline. Under this code share agreement, the Company agreed to
purchase a limited number of seats on Chicago Express flights
operating between Chicago-Midway and the cities of Indianapolis
and Milwaukee. As is customary for code share agreements in the
airline industry, the seats purchased by the Company were listed
on major CRS systems as ATA seats, even though the flights were
to be operated by a separate airline. Chicago Express uses
19-seat Jetstream 31 propeller aircraft, which the Company
determined were a more economic alternative to satisfying the
demand in these markets than the use of the Company's own larger
jet aircraft.
Effective April 1, 1997 the Company expanded this relationship
by agreeing to purchase all seats on Jetstream 31 flights
between Chicago-Midway and Indianapolis and Milwaukee, and by
adding similar flights between Chicago-Midway and the cities of
Des Moines, Dayton and Grand Rapids. In October 1997 the Company
added the cities of Lansing and Madison to the flights operated
on its behalf by Chicago Express. In all cases, the Company
purchases all available seats on these flights and markets them
as ATA flights through normal scheduled service distribution
channels.
Included in the Company's scheduled service sales for jet
operations are bulk sales agreements with tour operators. Under
these arrangements, which are very similar to charter sales, the
tour operator may take up to 85% of an aircraft as a bulk-seat
purchase. The portion which the Company retains is sold through
its own scheduled service distribution network. The advantage
for the tour operators is that their product is available for
sale in computer reservations systems ("CRS") and through other
scheduled service distribution channels. Under bulk sales
arrangements, the Company is obligated to provide transportation
to the tour operators' customers even in the event of
non-payment to the Company by the tour operator. To minimize its
exposure under these arrangements, the Company requires bonding
or a security deposit for a significant portion of the contract
price. Bulk seat sales amounted to $71.1 million and $67.3
million in 1997 and 1996, respectively, which represented 9.1%
and 9.0%, respectively, of the Company's consolidated revenues
for such periods.
Other Revenues
In addition to its core charter and scheduled service
businesses, the Company operates several other smaller
businesses that complement its core businesses. For example, the
Company sells ground arrangements (hotels, car rentals and
attractions) through its Ambassadair Travel Club and ATA
Vacations subsidiaries; provides airframe and powerplant
mechanic training through ATA Training Corporation; and provides
helicopter charter services through its ExecuJet subsidiary. In
aggregate, these businesses, together with incidental revenues
associated with charter and scheduled service businesses,
accounted for 6.6% and 7.1%, respectively, of consolidated
revenues in 1997 and 1996.
Sales and Marketing
Charter Sales
Tour Operator Programs. The Company markets its charter services
to tour operators primarily through its own sales force. The
charter sales department's principal office is in Indianapolis,
but it also has offices in Orlando, New York, San Francisco,
Seattle, Boston, Chicago, Detroit and London. Through this sales
force, the Company markets its charter, military and specialty
products. While most of the Company's charter and specialty
products are transacted directly with the end customer, the
Company from time to time will utilize independent brokers to
acquire some contracts.
In general, tour operators either package the Company's flights
with traditional ground components (e.g., hotels, rental cars
and attractions) or sell only the airline passage ("airfare
only"). Tickets on the Company's flights contracted to tour
operators are issued by the tour operator either directly to
passengers or through retail travel agencies. Under current DOT
regulations with respect to charter transportation originating
in the United States, all charter airline tickets must generally
be paid for in cash and all funds received from the sale of
charter seats (and in some cases funds paid for land
arrangements) must be placed into escrow or must be protected by
a surety bond satisfying prescribed standards. Currently, the
Company provides a third-party bond which is unlimited in amount
but restricted in use to the satisfaction of its obligations
under these regulations. Under the terms of its bonding
arrangement, the issuer of the bond has the right to terminate
the bond at any time on 30 days' notice. The Company provides a
$2.5 million letter of credit to secure its potential
obligations to the issuer of the bond. If the bond were to be
materially limited or canceled, the Company, like all other U.S.
charter airlines, would be required to escrow funds to comply
with the DOT requirements summarized above. Compliance with such
requirements would reduce the Company's liquidity and require it
to fund higher levels of working capital ranging up to $13.5
million based upon 1997 peak travel periods. See " --
Regulation."
In general, the Company enters into contracts with tour
operators four to nine months in advance of the commencement of
flight services. Pursuant to these contracts, tour operators,
who may be thinly capitalized, generally are required to pay a
deposit to the Company at the time the contract is executed for
as much as one week's revenue due under the contract (in the
case of recurring pattern contracts), to 10% to 30% of the total
contract price (in the case of non-recurring pattern contracts).
Tour operators are required to pay the remaining balance of the
contract price in full at least two weeks prior to the flight
date. In the event the tour operator fails to make the remaining
payment when due, the Company must either cancel the flight at
least ten days prior to the flight date or, pursuant to DOT
regulations, perform under the contract notwithstanding the
breach by the tour operator. In the event the tour operator
cancels or defaults under the contract with the Company or
otherwise notifies the Company that such tour operator no longer
needs charter service, the Company is entitled to keep
contractually established cancellation fees, which may be more
or less than the deposit. Whether the Company elects to exercise
this right in a particular case will depend upon a number of
factors, including the Company's ability to redeploy the
aircraft, the amount of money on deposit or secured by a letter
of credit, the relationship the Company has with the tour
operator and general market conditions existing at the time. The
Company may choose to renegotiate a contract with a tour
operator from time to time based on market conditions. As part
of any such renegotiation a tour operator may seek to reduce the
per-seat price or the number of flights or seats per flight
which the tour operator is obligated to purchase.
Military/Government. Traditionally, the Company's focus has been
on short-term contract expansion business which is routinely
awarded by the U.S. government based on price and availability
of appropriate aircraft. The short-term expansion business is
awarded pro rata to the carriers with aircraft availability who
have been awarded the most fixed-award business, and then to any
additional carrier that has aircraft available.
Pursuant to the military's fixed-award system, each
participating airline is given certain "mobilization value
points" based on the number and type of aircraft then available
from such airline. A participant may increase the number of its
mobilization value points by teaming up with one or more other
airlines to increase the total number of mobilization value
points of the team. Generally, a charter passenger airline will
seek to team up with one or more cargo airlines and vice versa.
When the military determines its requirements for a contract
year, it determines how much of each particular type of service
it will need (e.g., narrow-body, passenger service). It will
then award each type of business to those carriers or teams that
have committed to make available that type of aircraft and
service, with the carriers or teams with the highest amount of
mobilization value points given a preference. When an award is
made to a team, the charter passenger airline will generally
perform the passenger part of the award and a cargo airline will
perform the cargo part of the award.
In 1992, the Company entered into a contractor teaming
arrangement with four other cargo airlines serving the U.S.
military. The Company currently represents 100% of the passenger
portion of the contractor teaming arrangement. If the Company
used only its own mobilization value points, it would be
entitled to a fixed-award of approximately 1% of total awards
under the system; however, when all of the Company's team
members are taken into account, their portion of the fixed-award
is approximately 34% of total awards under the system. As a
result, the contractor teaming arrangement significantly
increases the likelihood that the team will receive a
fixed-award contract, and, to the extent the award includes
passenger transport, increases the Company's opportunity to
provide such service because the Company represents 100% of the
team's passenger transport capacity. In addition, since the
expansion business awards are correlated with the fixed-award
system, the Company, through its contractor teaming arrangement,
should also receive a greater percentage of the short-term
expansion business. As part of its participation in this
contract teaming arrangement, the Company pays a utilization fee
or commission to the other team members.
Scheduled Service
In scheduled service, the Company markets air travel, as well as
packaged leisure travel products, directly to its customers and
through travel agencies and bulk tour operators in selected
markets. Approximately 74.8% and 71.2% of the Company's
scheduled services were sold by travel agents and bulk tour
operators in 1997 and 1996, respectively, often using computer
reservation systems that have been developed and are controlled
by other airlines. Federal regulations have been promulgated
that are intended to diminish preferential flight schedule
displays and other practices with respect to the reservation
systems that could place the Company and other similar users at
a competitive marketing disadvantage as compared to the airlines
controlling the systems. Travel agents generally receive
commissions based on the price of tickets sold. Accordingly,
airlines compete not only with respect to ticket price but also
with respect to the amount of commissions paid to appointed
agents. Airlines often pay additional commissions to appointed
agents in connection with special revenue programs. The Company
believes that by concentrating its scheduled service operations
in a few selected markets, such as the Company's Chicago-Midway
complex, its marketing and advertising expenditures will be much
more effective. The Company believes this strategy will continue
to strengthen its competitive position and improve both load
factors and yields in its scheduled service operations.
The Company's sales and marketing strategy for scheduled
services has continued to emphasize convenience and simplified
pricing for the leisure traveler. In the summer of 1997, an
electronic ticketing option was implemented which provides
customers with the ability to purchase seats on scheduled
flights using a credit card while eliminating the need to issue
a paper ticket. Also in 1997, the Company became only the fifth
domestic U.S. airline to offer fully interactive capabilities
for customers to purchase tickets electronically via the
internet. In late 1996, the Company introduced convenient coupon
booklets which the customer can purchase in advance for use
throughout the Company's scheduled service system at guaranteed
low fares.
Aircraft Fleet
As of December 31, 1997, the Company was certified to operate a
fleet of 14 Lockheed L-1011s, 24 Boeing 727-200ADVs and 7 Boeing
757-200s. (Jetstream 31 propeller aircraft operated by Chicago
Express are not included on the Company's certificate.)
Lockheed L-1011 Aircraft. The Company's 14 Lockheed L-1011
aircraft are wide-body aircraft, 12 of which have a range of
2,971 nautical miles and 2 of which have a range of 3,425
nautical miles. These aircraft conform to the FAA's Stage 3
noise requirements and have a low ownership cost relative to
other wide-body aircraft types. See " -- Environmental Matters."
As a result, the Company believes these aircraft provide a
competitive advantage when operated on long-range routes, such
as on transatlantic, Caribbean and West Coast-Hawaii routes.
These aircraft have an average age of approximately 23 years. As
of December 31, 1997, 13 of these aircraft were owned by the
Company and one was under an operating lease that expires in
March 2001. Certain of the Lockheed L-1011 aircraft owned by the
Company are subject to mortgages and other security interests
granted in favor of the Company's lenders under its bank credit
facility. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Credit Facilities."
Boeing 727-200ADV Aircraft. The Company's 24 Boeing 727-200ADV
aircraft are narrow-body aircraft equipped with high thrust,
JT8D-15/-15A/-17/-17A engines and have a range of 2,050 nautical
miles. These aircraft, of which 15 conform to Stage 2 and 9
conform to Stage 3 noise requirements as of December 31, 1997,
have an average age of approximately 18 years. The Company
leases 23 of these aircraft, with initial lease terms that
expire between March 1998 and September 2003, subject to the
Company's right to extend each lease for varying terms. The
Company will be required prior to December 31, 1999 to make
expenditures for engine "hushkits" or to acquire replacement
aircraft so that its entire fleet conforms to Stage 3 noise
requirements in accordance with FAA regulations. The Company
currently plans to install hushkits on six Stage 2 aircraft by
the end of 1998, with the balance of nine Stage 2 aircraft being
converted to Stage 3 in 1999. See "--Environmental Matters".
Boeing 757-200ADV Aircraft. The Company's 7 Boeing 757-200
aircraft are relatively new, narrow-body aircraft, all of which
have a range of 3,679 nautical miles. These aircraft, six of
which are leased, have an average age of approximately 3 years
and meet Stage 3 noise requirements. The Company's Boeing
757-200s have higher ownership costs than the Company's Lockheed
L-1011 and Boeing 727-200ADV aircraft, but lower operational
costs. In addition, unlike most other aircraft of similar size,
the Boeing 757-200 has the capacity to operate on extended
flights over water. The leases for the Company's Boeing 757-200
aircraft have initial terms that expire on various dates between
May 2002 and December 2015, subject to the Company's right to
extend each lease for varying terms.
Although Lockheed L-1011 and Boeing 727-200ADV aircraft are
subject to the FAA's Aging Aircraft program, the Company does
not currently expect that its cost of compliance for these
aircraft will be material.
See "-- Regulation."
Flight Operations
Worldwide flight operations are planned and controlled by the
Company's Flight Operations Group operating out of its
facilities located in Indianapolis, Indiana, which are staffed
on a 24-hour basis, seven days a week. Logistical support
necessary for extended operations away from the Company's fixed
bases are coordinated through its global communications network.
The Company's complex operating environment demands a high
degree of skill and flexibility from its Flight Operations
Group.
In order to enhance the reliability of its service, the Company
seeks to maintain at least two spare Lockheed L-1011 and three
spare Boeing 727-200 aircraft at all times. Spare aircraft can
be dispatched on short notice to most locations where a
substitute aircraft is needed for mechanical or other reasons.
These spare aircraft allow the Company to provide to its
customers a dispatch reliability that is hard for an airline of
comparable or smaller size to match.
Maintenance and Support
The Company's Maintenance and Engineering Center is located at
Indianapolis International Airport. This 120,000 square-foot
facility was designed to meet the maintenance needs of the
Company's operations as well as to provide supervision and
control of purchased maintenance services. The Company performs
approximately 75% of its own maintenance work, excluding engine
overhauls and Lockheed L-1011 and Boeing 727-200 heavy airframe
checks.
The Company currently maintains ten permanent maintenance
facilities, including its Indianapolis facility. In addition,
the Company utilizes "road teams," which are dispatched
primarily as charter flight operations require to arrange for
and supervise maintenance services at temporary locations. The
Company also uses road teams to supervise all maintenance not
performed in-house.
The Maintenance and Engineering Center is an FAA-certificated
repair station and has the expertise to perform routine, as well
as non-routine, maintenance on Lockheed L-1011, Boeing 727-200
and Boeing 757-200 aircraft. Capabilities of the Maintenance and
Engineering Center include: (i) airworthiness directive and
service bulletin compliance; (ii) modular teardown and buildup
of Rolls- Royce RB211-22B engines; (iii) non-destructive
testing, including radiographics, x-ray, ultrasound, magnetic
particle and eddy current; (iv) avionics component repair; (v)
on-wing engine testing; (vi) interior modification; (vii) repair
and overhaul of accessories and components, including hydraulic
units and wheel and brake assemblies; and (viii) sheet metal
repair with hot bonding and composite material capabilities. The
Company contracts with third parties for certain engine and
airframe overhaul and other services if the Company does not
have the technical capability or facility capacity, or if such
services can be obtained on a more cost-effective basis from
outside sources.
Fuel Price Risk Management
Most of the Company's contracts with independent tour operators
include fuel price reimbursement clauses. Such clauses generally
state that if the Company's cost of fuel per gallon to perform
the contract meets or exceeds a stated trigger price, fuel costs
in excess of the trigger price are required to be reimbursed to
the Company by the tour operator. Protection under such fuel
escalation provisions is generally limited to those price
increases which occur 14 or more days prior to flight date. Fuel
price increases which occur during the last 14 days prior to
flight date are the responsibility of the Company. In addition,
if the fuel price increase exceeds 10% of the contractual
trigger price, the tour operator generally has the right to
cancel the contract. Tour operator revenues subject to such fuel
price reimbursement clauses represented approximately 29.1% and
30.2%, respectively, of consolidated revenues for 1997 and 1996.
The Company's contract with the U.S. military also includes a
fuel price guarantee, which is incorporated into the
reimbursement rates by aircraft type each contract year. If the
actual cost of fuel consumed is less than the guaranteed price,
the Company is required to reimburse the U.S. military for the
excess revenues received. If the actual cost of fuel consumed is
more than the guaranteed price, the U.S. military reimburses the
Company for the additional costs incurred. In this manner, the
Company is guaranteed to pay the actual cost of fuel up to the
maximum price guaranteed in the contract. This fuel price
guarantee is renegotiated each contract year. Military revenues
subject to the fuel price guarantee represented approximately
16.8% and 11.2%, respectively, of consolidated revenues for 1997
and 1996.
Within the Company's scheduled service business unit are
included bulk seat sales to tour operators. Under these
contracts, which are very similar to tour operator agreements,
the bulk seat contractor may purchase up to 85% of the available
seats on scheduled service flights. Most of these agreements
also provide for fuel escalation reimbursements to be made to
the Company in a manner similar to the tour operator agreements
described above. Scheduled service bulk seat revenues subject to
such fuel price reimbursement clauses represented approximately
9.1% and 9.0%, respectively, of consolidated revenues for 1997
and 1996.
As a result of the fuel reimbursement clauses and guarantees
described above, approximately 54.9% and 50.4%, respectively, of
consolidated revenues in 1997 and 1996 were subject to such fuel
price protection. The Company closely monitors jet fuel spot
prices and crude oil and heating oil futures markets to provide
early indications of potential shifts in jet fuel prices for
timely management review and action. The Company did not engage
in any material fuel hedging activities in 1997 or 1996, but has
begun a hedging program in 1998.
Competition
The Company competes in a number of different markets because it
offers different products and services, and the nature and
intensity of such competition varies from market to market. In
marketing its charter and scheduled airline services, the
Company emphasizes its ability to provide a simplified product
primarily designed to meet the needs of leisure travelers. This
includes offering low fares, nonstop or direct flights from the
customer's city of origin and in-flight services that are
comparable to standard coach service on scheduled airlines. By
offering low-cost air travel products that can be tailored to
meet the specific needs of its customers, particularly
independent tour operators, the Company believes it is able to
differentiate itself from most major scheduled airlines, whose
principal focus is on frequent scheduled service on established
routes, as well as from smaller charter airlines, which often do
not have comparably diverse fleets or the ability to provide
similar support or customization.
In the United States, there are few barriers to entry into the
airline business, apart from the need for certain government
licenses and the availability of aircraft and financing. This is
particularly true for those airlines seeking to operate on a
small scale with limited infrastructure and other support
systems. As a result, the Company may face competition from
start-up airlines in selected markets from time to time. In the
leisure travel market, the Company's principal business, the
competition for airline passengers is significant. The Company
competes with both scheduled and charter airlines, both in the
U.S. and internationally. The Company generally competes on the
basis of price, availability of equipment, quality of service
and convenience.
Competition from Scheduled Airlines
The Company competes against U.S., European and Mexican
scheduled airlines, most of which are significantly larger than
the Company and many of which have greater access to capital
than the Company. These airlines compete for leisure travel
customers in a variety of ways, including wholesaling discounted
seats to tour operators on scheduled flights, promoting
prepackaged tours to travel agents for sale to retail customers
and selling discounted, airfare-only products to the public.
Charter airlines generally have a lower cost structure than most
scheduled airlines. The major scheduled airlines typically incur
higher costs related to aircraft ownership, labor, marketing and
airport facilities, among other items. Because of their cost
structures, the scheduled airlines generally do not compete
directly with charter airlines on a price basis except with a
limited inventory of seats. However, during periods of dramatic
fare cuts by the scheduled airlines, the Company is forced to
compete more broadly against larger numbers of deeply discounted
seats. The scheduled airlines do compete regularly with charter
airlines by selling varying amounts of excess seat capacity to
tour operators and consolidators at discounted bulk rates, and
also selling charter services on a limited basis.
The Company's charter service also competes against the
scheduled airlines on the basis of convenience and quality of
service. As the U.S. scheduled airline industry has
consolidated, the traffic patterns have evolved into what is
commonly referred to as the "hub-and-spoke" system. Partially as
a result of the creation of numerous hub-and-spoke route
systems, many smaller cities are not served by direct or nonstop
flights to leisure destinations, and many secondary leisure
destinations do not receive direct or nonstop service from more
than a few major U.S. cities. The Company, through tour
operators, targets these markets by offering nonstop service to
leisure destinations on a limited-frequency basis designed to
appeal to the leisure traveler and to provide relatively high
load factors. The Company believes that a significant amount of
its charter flights provide attractive leisure nonstop service
to destinations not as conveniently available to passengers
through scheduled airline hub-and-spoke systems.
The Company competes directly with several scheduled airlines on
certain leisure routes, particularly in the Indianapolis,
Milwaukee and Chicago-Midway markets. Although several airlines
serve these markets, the Company historically has been able to
compete successfully for the leisure customer. The Company is
continually evaluating its scheduled service markets for their
future potential in light of competitive conditions.
Competition from Charter Airlines
In addition to competing with major domestic, European and
Mexican scheduled airlines, the Company also faces competition
from charter airlines. In the U.S., the Company competes
primarily with Sun Country and Miami Air, two smaller U.S.
charter airlines. This is the lowest number of domestic charter
carriers competing for this business in many years, a situation
that could promote additional entries into the charter market.
In Europe, the Company competes with large European charter
airlines, several of which are owned by more highly integrated
transportation companies which also own tour operators and
travel agencies or scheduled airlines. To date, the Company has
been able to compete successfully against U.S., Mexican and
European charter airlines.
Insurance
The Company carries types and amounts of insurance customary in
the airline industry, including coverage for public liability,
passenger liability, property damage, aircraft loss or damage,
baggage and cargo liability and worker's compensation. Under the
Company's current insurance policies, it will not be covered by
such insurance were it to fly, without the consent of its
insurance provider, to certain high risk countries. The Company
does not consider the inability to operate into or out of any of
these countries to be a significant limitation on its business.
The Company will support certain U.S. government operations in
areas where its insurance policy does not provide coverage for
losses when the U.S.
government provides replacement insurance coverage.
Employees
As of December 31, 1997, the Company had 5,012 employees,
approximately 1,900 of which were represented under collective
bargaining agreements. In June 1991, the Company's flight
attendants elected the Association of Flight Attendants ("AFA")
as their representative. In December 1994, the flight attendants
ratified a four-year collective agreement. In June 1993, the
Company's cockpit crews elected the International Brotherhood of
Teamsters ("IBT") as their representative. In September 1996, a
four-year collective agreement was ratified by the cockpit
crews.
The Company believes that its relations with its employees are
good. However, the existence of a significant dispute with any
sizeable number of its employees could have a material adverse
effect on the Company's operations and financial condition.
Regulation
The Company is an air carrier subject to the jurisdiction of and
regulation by the DOT and the FAA. The DOT is primarily
responsible for regulating consumer protection and other
economic issues affecting air services and determining a
carrier's fitness to engage in air transportation. In 1981, the
Company was granted by the DOT a Certificate of Public
Convenience and Necessity pursuant to Section 401 of the Federal
Aviation Act authorizing it to engage in air transportation. The
Company is also subject to the jurisdiction of the FAA with
respect to its aircraft maintenance and operations. The FAA
requires each carrier to obtain an operating certificate and
operations specifications authorizing the carrier to fly to
specific airports using specified equipment. All of the
Company's aircraft must also have and maintain certificates of
airworthiness issued by the FAA. The Company holds an FAA air
carrier operating certificate under Part 121 of the Federal
Aviation Regulations.
The Company believes it is in compliance with all requirements
necessary to maintain in good standing its operating authority
granted by the DOT and its air carrier operating certificate
issued by the FAA. A modification, suspension or revocation of
any of the Company's DOT or FAA authorizations or certificates
could have a material adverse effect upon the Company.
The FAA has issued a series of Airworthiness Directives under
its "Aging Aircraft" program which are applicable to the
Company's Lockheed L-1011 and Boeing 727-200 aircraft. The
Company does not currently expect the future cost of these
directives to be material.
Several aspects of airline operations are subject to regulation
or oversight by federal agencies other than the DOT and FAA. The
United States Postal Service has jurisdiction over certain
aspects of the transportation of mail and related services
provided by the Company through its cargo affiliate. Labor
relations in the air transportation industry are generally
regulated under the Railway Labor Act, which vests in the
National Mediation Board certain regulatory powers with respect
to disputes between airlines and labor unions arising under
collective bargaining agreements. The Company is subject to the
jurisdiction of the Federal Communications Commission regarding
the utilization of its radio facilities. In addition, the
Immigration and Naturalization Service, the U.S. Customs
Service, and the Animal and Plant Health Inspection Service of
the Department of Agriculture have jurisdiction over inspection
of the Company's aircraft, passengers and cargo to ensure the
Company's compliance with U.S. immigration, customs and import
laws. The Commerce Department also regulates the export and
re-export of the Company's U.S.-manufactured aircraft and
equipment.
In addition to various federal regulations, local governments
and authorities in certain markets have adopted regulations
governing various aspects of aircraft operations, including
noise abatement, curfews and use of airport facilities. Many
U.S. airports have adopted or are considering adopting a
"Passenger Facility Charge" of up to $3.00 generally payable by
each passenger departing from the airport. This charge must be
collected from passengers by transporting air carriers, such as
the Company, and must be remitted to the applicable airport
authority. Airport operators must obtain approval of the FAA
before they may implement a Passenger Facility Charge.
Based upon bilateral aviation agreements between the U.S. and
other nations, and, in the absence of such agreements, comity
and reciprocity principles, the Company, as a charter carrier,
is generally not restricted as to the frequency of its flights
to and from most destinations in Europe. However, these
agreements generally restrict the Company to the carriage of
passengers and cargo on flights which either originate in the
U.S. and terminate in a single European nation, or which
originate in a single European nation and terminate in the U.S.
Proposals for any additional charter service must generally be
specifically approved by the civil aeronautics authorities in
the relevant countries. Approval of such requests is typically
based on considerations of comity and reciprocity and cannot be
guaranteed.
Environmental Matters
Under the Airport Noise and Capacity Act of 1990 and related FAA
regulations, the Company's aircraft must comply with certain
Stage 3 noise restrictions by certain specified deadlines. These
regulations require that the Company achieve a 75% Stage 3 fleet
by December 31, 1998. In general, the Company would be
prohibited from operating any Stage 2 aircraft after December
31, 1999. As of December 31, 1997, 67% of the Company's fleet
met Stage 3 requirements. The Company expects to meet future
Stage 3 fleet requirements through Boeing 727-200 hushkit
modifications, combined with additional future deliveries of
Stage 3 aircraft.
In addition to the aircraft noise regulations administered by
the FAA, the Environmental Protection Agency ("EPA") regulates
operations, including air carrier operations, which affect the
quality of air in the United States. The Company believes it has
made all necessary modifications to its operating fleet to meet
fuel-venting requirements and smoke-emissions standards.
The Company maintains on its property in Indiana two underground
storage tanks which contain quantities of de-icing fluid and
emergency generator fuel. These tanks are subject to various EPA
and State of Indiana regulations. The Company believes it is in
substantial compliance with applicable regulatory requirements
with respect to these storage facilities.
At its aircraft line maintenance facilities, the Company uses
materials which are regulated as hazardous under federal, state
and local law. The Company maintains programs to protect the
safety of its employees who use these materials and to manage
and dispose of any waste generated by the use of these
materials, and believes that it is in substantial compliance
with all applicable laws and regulations.
Item 2. Properties
The Company leases three adjacent office buildings in
Indianapolis, consisting of approximately 136,000 square feet.
These buildings are located approximately one mile from the
Indianapolis International Airport terminal and are used as
principal business offices and for the operation of the
Indianapolis reservations center.
The Company's Maintenance and Engineering Center is also located
at Indianapolis International Airport. This 120,000 square-foot
facility was designed to meet the base maintenance needs of the
Company's operations, as well as to provide support services for
other maintenance locations. The Indianapolis Maintenance and
Engineering Center is an FAA-certificated repair station and has
the capability to perform routine, as well as non-routine,
maintenance on the Company's aircraft.
In 1998, the Company expects to begin construction of an 80,000
square foot office building immediately adjacent to the
Company's Indianapolis Maintenance and Engineering Center. This
facility will house the Company's Maintenance and Engineering
professional staff and also will serve as a training center for
various groups within the Company.
In 1995, the Company completed the lease of Hangar No. 2 at
Chicago's Midway Airport for an initial lease term of ten years,
subject to two five-year renewal options. The Company has
subsequently completed significant improvements to this leased
property, which is used to support line maintenance for the
Boeing 757-200 and Boeing 727-200 narrow-body fleets.
Also in 1995, the Company relocated and expanded its Chicago
area reservations unit to an 18,700 square-foot facility located
near Chicago's O'Hare Airport. This reservation facility
primarily serves customers in the greater Chicago metropolitan
area in support of the Company's Chicago-Midway scheduled
service operation.
The Company also routinely leases various properties at airports
around the world for use by its passenger service, flight oper-
ations, crews and maintenance staffs. Other properties are also
leased for the use of sales office staff. These properties are
used in support of both scheduled and charter flight operations
at such diverse locations as Baltimore, Boston, Cancun, Chicago,
Cleveland, Dallas/Ft. Worth, Detroit, Ft. Lauderdale, Ft. Myers,
Frankfurt, Honolulu, Indianapolis, Las Vegas, London Gatwick,
Los Angeles, Miami, Milwaukee, Minneapolis, New York, Orlando,
Philadelphia, Phoenix, St. Louis, St. Petersburg, San Francisco,
San Juan and Sarasota.
At December 31, 1997, the Company was certified to operate a
fleet of 45 aircraft. The following table summarizes the
ownership, lease term (where applicable), standard seating
configuration (all coach), and Stage 2/Stage 3 noise
characteristics of each aircraft operated by the Company as of
the end of 1997.
Aircraft Owned/Leased Lease Expiration Seats Stage
(month/year)
---------------------------------- -------------------- -------------------- --------------- ------------
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-50 Owned n/a 362 3
Lockheed L-1011-100 Owned n/a 362 3
Lockheed L-1011-100 Leased 03/2002 362 3
Boeing 727-200ADV Owned n/a 173 2
Boeing 727-200ADV Leased 03/1998 173 2
Boeing 727-200ADV Leased 04/1998 173 2
Boeing 727-200ADV Leased 11/1998 173 2
Boeing 727-200ADV Leased 01/1999 173 3
Boeing 727-200ADV Leased 12/1999 173 2
Boeing 727-200ADV Leased 02/2000 173 2
Boeing 727-200ADV Leased 02/2000 173 2
Boeing 727-200ADV Leased 02/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 03/2000 173 2
Boeing 727-200ADV Leased 10/2000 173 2
Boeing 727-200ADV Leased 10/2000 173 2
Boeing 727-200ADV Leased 10/2000 173 2
Boeing 727-200ADV Leased 12/2001 173 3
Boeing 727-200ADV Leased 03/2002 173 3
Boeing 727-200ADV Leased 05/2002 173 3
Boeing 727-200ADV Leased 08/2002 173 3
Boeing 727-200ADV Leased 09/2002 173 3
Boeing 727-200ADV Leased 11/2002 173 3
Boeing 727-200ADV Leased 11/2002 173 3
Boeing 727-200ADV Leased 09/2003 173 3
Boeing 757-28AER Owned n/a 216 3
Boeing 757-2Q8 Leased 05/2002 216 3
Boeing 757-23N Leased 04/2008 216 3
Boeing 757-23N Leased 12/2010 216 3
Boeing 757-23N Leased 06/2014 216 3
Boeing 757-23N Leased 12/2014 216 3
Boeing 757-23N Leased 12/2015 216 3
Item 3. Legal Proceedings
Various claims, contractual disputes and lawsuits against the
Company arise periodically involving complaints which are normal and
reasonably foreseeable in light of the nature of the Company's
business. The majority of these suits are covered by insurance. In
the opinion of management, the resolution of these claims will not
have a material adverse effect on the business, operating results or
financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the
quarter ended December 31, 1997.
Part II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters
The Company's common stock trades on the Nasdaq National Market tier
of The Nasdaq Stock Market under the symbol "AMTR." The Company had
327 registered shareholders at December 31, 1997.
Year Ended December 31, 1997
Market Prices of Common Stock High Low Close
-------------- ------------------- -----------------
First quarter 10 7/8 7 8 3/8
Second quarter 9 5/8 7 7/8 8 1/4
Third quarter 8 3/4 6 5/8 8 1/4
Fourth quarter 8 1/2 6 7/8 7 7/8
No dividends have been paid on the Company's common stock since
becoming publicly held.
PART II - Continued
Item 6. Selected Consolidated Financial Data - (Unaudited)
The unaudited selected consolidated financial data in this table have
been derived from the consolidated financial statements of the
Company for the respective periods presented. The data should be read
in conjunction with the consolidated financial statements and related
notes.
Amtran, Inc.
Five-Year Summary
Year Ended December 31,
-------------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
(In thousands, except per share data and ratios)
-------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Operating revenues $ 467,909 $ 580,522 $ 715,009 $ 750,851 $ 783,193
Operating expenses 461,289 572,107 697,073 786,907 769,709
Operating income (loss) (1) 6,620 8,415 17,936 (36,056) 13,484
Income (loss) before taxes 3,866 5,879 14,653 (39,581) 6,027
Net income (loss) 3,035 3,486 8,524 (26,674) 1,572
Net income (loss) per share - basic (2) 0.28 0.30 0.74 (2.31) 0.14
Net income (loss) per share - diluted (2) 0.28 0.30 0.74 (2.31) 0.13
Balance Sheet Data:
Property and equipment, net $ 172,244 $ 223,104 $ 240,768 $ 224,540 $ 267,681
Total assets 269,830 346,288 413,137 369,601 450,857
Total debt 79,332 118,106 138,247 149,371 191,804
Shareholders' equity (3) 69,941 72,753 81,185 54,744 56,990
Ratio of total debt to shareholders' equity 1.13 1.62 1.70 2.73 3.37
Ratio of total liabilities to shareholders' equity 2.86 3.76 4.09 5.75 6.91
Selected Operating Statistics for
Consolidated Passenger Services: (4)
Revenue passengers carried (thousands) 2,971.8 4,237.9 5,368.2 5,680.5 5,307.4
Revenue passenger miles (millions) 5,593.5 7,158.8 8,907.7 9,172.4 8,986.0
Available seat miles (millions) 8,232.5 10,443.1 12,521.4 13,295.5 12,647.7
Passenger load factor 67.9% 68.6% 71.1% 69.0% 71.0%
(1) The Company has reclassified gain (loss) on the sale of
operating assets for 1993-1995 from non-operating gain (loss)
to operating income (loss) to be consistent with the 1996-1997
presentation. Also, in the third quarter of 1996 the Company
recorded a $4.7 million loss on the disposal of leased assets
associated with the reconfiguration of its fleet.
(2) In 1997, the Company adopted Financial Accounting
Standards Board Statement 128, "Earnings per Share", which
establishes new standards for the calculation and disclosure
of earnings per share. All prior period earnings per share
amounts disclosed in this five-year summary have been restated
to conform to the new standards under Statement 128.
(3) No dividends were paid in any periods presented.
(4) Operating statistics pertain only to ATA and do not include
information for other operating subsidiaries of the Company.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Amtran is a leading provider of charter airline services and, on a targeted
basis, scheduled airline services to leisure and other value-oriented travelers.
Amtran, through its principal subsidiary, American Trans Air, Inc. ("ATA"), has
been operating for 24 years and is the eleventh largest U.S. airline in terms of
1997 revenue passenger miles. ATA provides charter service throughout the world
to independent tour operators, specialty charter customers and the U.S.
military. Scheduled service is provided through nonstop and connecting flights
from the gateway cities of Chicago-Midway, Indianapolis and Milwaukee to popular
vacation destinations such as Hawaii, Las Vegas, Florida, California, Mexico and
the Caribbean.
An analysis by the Company in 1996 of the profitability of its scheduled service
and charter service business units disclosed that a significant number of
scheduled service markets then being served by the Company had become
increasingly unprofitable at that point in time. The Company believes that
several key factors had contributed to the deterioration of profitability of
scheduled service operations in that time period, including (i) a significant
increase in competition from larger carriers in the Company's scheduled service
markets; (ii) the negative impact on low-fare carriers, such as the Company,
from unfavorable media coverage of the ValuJet accident in Florida on May 11,
1996, and, to a lesser extent, the Company's own decompression incident on the
following day; (iii) a significant increase in jet fuel costs; and (iv) a
federal excise tax on jet fuel beginning in the fourth quarter of 1995.
In August 1996, the Company announced a significant restructuring of scheduled
service operations. More than one-third of scheduled service capacity operated
during the summer of 1996 was eliminated. The Company completely eliminated its
Boston and intra-Florida scheduled service operations and also exited
completely, or reduced in frequency, certain markets served from Chicago-Midway,
Indianapolis and Milwaukee. In conjunction with this restructuring, the Company
completed a 15% reduction in its employee and contract work forces by the end of
1996.
In addition, the Company re-evaluated the relative economic performance of its
three aircraft fleet types in the context of the restructured markets to be
served by the Company and optimized the type and number of aircraft through a
fleet restructuring which was completed by the end of 1996. The Company reduced
the number of Boeing 757-200 aircraft from 11 units at the end of 1995 to seven
units at the end of 1996. The remaining seven Boeing 757-200 aircraft are all
powered by Rolls-Royce engines. The Company committed the seven Boeing 757-200s
to mission-specific uses in the U.S. military and scheduled service business
units.
As a result of the 1996 restructuring, the Company believes that it has
established a better economic platform from which to pursue its long-term
strategies of: (i) maintaining its low-cost advantage versus competitors; (ii)
strengthening its leading position in the charter business; (iii) maintaining
its leading position as a provider to the U.S. military; (iv) selectively
participating in scheduled service; and (v) capitalizing on selected growth
opportunities in areas of the Company's core competency.
Results of Operations
In 1997 the results of operations for the Company showed significant improvement
as compared to 1996. For the twelve months ended December 31, 1997, the Company
earned $13.5 million in operating income, as compared to an operating loss of
$36.1 million in the twelve months ended December 31, 1996; and the Company
earned $1.6 million in net income in 1997, as compared to a net loss of $26.7
million in 1996. Operating results for 1997 were significantly impacted by the
accelerated recognition in the second quarter of $2.0 million in prepaid
compensation expense due to the resignation of its former President and Chief
Executive Officer in May 1997. Approximately $1.7 million of this amount
provided no income tax benefit to the Company.
The Company's 1997 operating revenues increased 4.3% to $783.2 million, as
compared to $750.9 million in 1996. Operating revenues per ASM increased 9.6% to
6.19 cents in 1997, as compared to 5.65 cents in 1996. ASMs decreased 4.9% to
12.648 billion from 13.296 billion, RPMs decreased 2.0% to 8.986 billion from
9.172 billion, and passenger load factor increased 2.0 points to 71.0% as
compared to 69.0%. Yield in 1997 increased 6.5% to 8.72 cents per RPM, as
compared to 8.19 cents per RPM in 1996. Total passengers boarded decreased 6.6%
to 5,307,390 in 1997, as compared to 5,680,496 in 1996, while total departures
increased 6.9% to 49,608 from 46,416 between the same comparable periods.
Operating expenses decreased 2.2% to $769.7 million in 1997 as compared to
$786.9 million in 1996. Cost per ASM increased 2.9% to 6.09 cents in 1997 as
compared to 5.92 cents in 1996.
Results of Operations in Cents Per ASM
The following table sets forth, for the periods indicated, operating revenues
and expenses expressed as cents per ASM.
Cents per ASM
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
Operating revenues: 6.19 5.65 5.71
Operating expenses:
Salaries, wages and benefits 1.36 1.23 1.13
Fuel and oil 1.22 1.21 1.03
Handling, landing and navigation fees 0.55 0.53 0.59
Depreciation and amortization 0.49 0.47 0.45
Aircraft rentals 0.43 0.49 0.44
Aircraft maintenance, materials and repairs 0.41 0.42 0.44
Crew and other employee travel 0.29 0.27 0.25
Passenger service 0.26 0.25 0.28
Commissions 0.21 0.20 0.20
Ground package cost 0.15 0.14 0.13
Other selling expenses 0.12 0.13 0.12
Advertising 0.10 0.08 0.07
Facility and other rents 0.07 0.07 0.06
Disposal of assets - 0.03 -
Other operating expenses 0.43 0.40 0.37
Total operating expenses 6.09 5.92 5.56
Operating income (loss) 0.10 (0.27) 0.15
ASMs (in thousands) 12,647,683 13,295,505 12,521,405
Year Ended December 31, 1997, Versus Year Ended December 31, 1996
Consolidated Flight Operations and Financial Data
The following table sets forth, for the periods indicated, certain key operating
and financial data for the consolidated flight operations of the Company. Data
shown for "jet" operations includes the consolidated operations of Lockheed
L-1011, Boeing 727-200 and Boeing 757-200 aircraft in all of the Company's
business units.
- ------------------------------------- ----------------------------------------------------------------
Twelve Months Ended December 31,
1997 1996 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 39,517 46,416 (6,899) (14.86)
Departures J31(a) 10,091 - 10,091 N/M
--------------- --------------- ---------------- ---------------
Total Departures (b) 49,608 46,416 3,192 6.88
--------------- --------------- ---------------- ---------------
Block Hours Jet 129,216 138,114 (8,898) (6.44)
Block Hours J31 10,210 - 10,210 N/M
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 139,426 138,114 1,312 0.95
--------------- --------------- ---------------- ---------------
RPMs Jet (000s) 8,967,900 9,172,438 (204,538) (2.23)
RPMs J31 (000s) 18,055 - 18,055 N/M
--------------- --------------- ---------------- ---------------
Total RPMs (000s) (d) 8,985,955 9,172,438 (186,483) (2.03)
--------------- --------------- ---------------- ---------------
ASMs Jet (000s) 12,615,230 13,295,505 (680,275) (5.12)
ASMs J31 (000s) 32,453 - 32,453 N/M
--------------- --------------- ---------------- ---------------
Total ASMs (000s) (e) 12,647,683 13,295,505 (647,822) (4.87)
--------------- --------------- ---------------- ---------------
Load Factor Jet 71.09 68.99 2.10 3.04
Load Factor J31 55.63 - N/M N/M
--------------- --------------- ---------------- ---------------
Total Load Factor (f) 71.05 68.99 2.06 2.99
--------------- --------------- ---------------- ---------------
Passengers Enplaned Jet 5,210,578 5,680,496 (469,918) (8.27)
Passengers Enplaned J31 96,812 - 96,812 N/M
--------------- --------------- ---------------- ---------------
Total Passengers Enplaned (g) 5,307,390 5,680,496 (373,106) (6.57)
--------------- --------------- ---------------- ---------------
Revenue $(000s) 783,193 750,851 32,342 4.31
RASM in cents (h) 6.19 5.65 0.54 9.56
CASM in cents (i) 6.09 5.92 0.17 2.87
Yield in cents (j) 8.72 8.19 0.53 6.47
- ------------------------------------- --------------- --------------- ---------------- ---------------
N/M - Not meaningful
(a) Effective April 1, 1997, the Company began service between Chicago-Midway
and the cities of Indianapolis, Milwaukee, Des Moines, Dayton and Grand Rapids
under an agreement with Chicago Express. Services were expanded to include
Lansing, Michigan and Madison, Wisconsin in October 1997.
(b) A departure is a single takeoff and landing operated by a single aircraft
between an origin city and a destination city.
(c) Block hours for any aircraft represent the elapsed time computed from the
moment the aircraft first moves under its own power from the origin city
boarding ramp to the moment it comes to rest at the destination city boarding
ramp.
(d) Revenue passenger miles (RPMs) represent the number of seats occupied by
revenue passengers multiplied by the number of miles those seats are flown. RPMs
are an industry measure of the total seat capacity actually sold by the Company.
(e) Available seat miles (ASMs) represent the number of seats available for sale
to revenue passengers multiplied by the number of miles those seats are flown.
ASMs are an industry measure of the total seat capacity offered for sale by the
Company, whether sold or not.
(f) Passenger load factor is the percentage derived by dividing RPMs by ASMs.
Passenger load factor is relevant to the evaluation of scheduled service because
incremental passengers normally provide incremental revenue and profitability
when seats are sold individually. In the case of tour operator and U.S. military
business units, load factor is less relevant because an entire aircraft is sold
by the Company instead of individual seats. Since both costs and revenues are
largely fixed for these types of flights, changes in load factor have less
impact on business unit profitability. Consolidated load factors and scheduled
service load factors for the Company are shown in the appropriate tables for
industry comparability, but load factors for individual charter businesses are
omitted from applicable tables.
(g) Passengers enplaned are the number of revenue passengers who occupied seats
on the Company's flights. This measure is also referred to as "passengers
boarded."
(h) Revenue per ASM (expressed in cents) is total operating revenue divided by
total ASMs. This measure is also referred to as "RASM." RASM measures the
Company's ability to maximize revenues from the sale of total available seat
capacity. In the case of scheduled service, RASM is a measure of the combined
impact of load factor and yield (see (j) below for the definition of yield). In
the case of tour operator and U.S. military businesses, RASM is a measure of the
Company's ability to maximize revenues from the sale of an entire aircraft at
one time. In all cases, RASM adjusts for the differing seat capacities on the
Company's various fleet types.
(i) Cost per ASM (expressed in cents) is total operating expense divided by
total ASMs. This measure is also referred to as "CASM". CASM measures the
Company's effectiveness in minimizing the operating cost of producing total seat
capacity.
(j) Revenue per RPM (expressed in cents) is total operating revenue divided by
total RPMs. This measure is also referred to as "yield." Yield is relevant to
the evaluation of scheduled service because yield is a measure of the Company's
ability to optimize the price paid by customers purchasing individual seats.
Yield is less relevant to the tour operator and U.S. military business units
because the entire aircraft is sold at one time for one price. Consolidated
yields and scheduled service yields are shown in the appropriate tables for
industry comparability, but yields for individual charter businesses are omitted
from applicable tables.
Operating Revenues
Total operating revenues for 1997 increased 4.3% to $783.2 million from $750.9
million in 1996. This increase was due to a $48.6 million increase in charter
revenues, partially offset by a $14.7 million decrease in scheduled service
revenues and a $1.6 million decrease in other revenues.
Scheduled Service Revenues. The following table sets forth, for the periods
indicated, certain key operating and financial data for the scheduled service
operations of the Company. Data shown for "jet" operations includes the combined
operations of Lockheed L-1011, Boeing 727-200 and Boeing 757-200 aircraft in
scheduled service.
- ------------------------------------- ----------------------------------------------------------------
Twelve Months Ended December 31,
1997 1996 Inc (Dec) % Inc (Dec)
--------------- --------------- ---------------- ---------------
Departures Jet 23,800 31,467 (7,667) (24.37)
Departures J31(a) 10,091 - 10,091 N/M
--------------- --------------- ---------------- ---------------
Total Departures (b) 33,891 31,467 2,424 7.70
--------------- --------------- ---------------- ---------------
Block Hours Jet 72,883 85,836 (12,953) (15.09)
Block Hours J31 10,210 - 10,210 N/M
--------------- --------------- ---------------- ---------------
Total Block Hours (c) 83,093 85,836